ECB braced to buy more debt as euro crisis goes to the wire

Mario Draghi, the incoming president of the European Central Bank, has signalled his readiness to continue the policy of buying up government bonds from Spain and Italy, while warning that this would “not resolve the underlying causes” of their problems.

Draghi, who steps down as governor of the Italian central bank this week, urged the Italian government to implement austerity measures “rapidly and in full”, in order to prevent the country’s cost of borrowing becoming unsustainable.

Only hours before the start of an emergency meeting of the European Council last night (26 October), Draghi said that the leaders of the eurozone countries should focus on two objectives: strengthening financial governance and “activating immediately” agreements to solve the crisis.

He said that without appropriate national policies to remove imbalances in public finances by promoting growth, the first objective could not be achieved and the second would be only a palliative.

Draghi, who takes over from Jean-Claude Trichet as the head of the ECB on 1 November, gave a strong hint that the buying up of Italian bonds would continue. He said that the ECB was determined “with its non-conventional measures [to] prevent malfunctioning in the money and financial markets creating an obstacle to monetary transmission”.

Draghi will preside for the first time over a meeting of the ECB governing council next Thursday (3 November).

Angela Merkel, the chancellor of Germany, yesterday repeated her warning that the fates of the euro and the European Union are intertwined. “If the euro fails, then Europe fails, and that cannot be allowed to happen,” she said. She won approval from the Bundestag yesterday afternoon to negotiate with her fellow eurozone leaders to strengthen the lending capacity of the bail-out fund, the European Financial Stability Facility (EFSF).

She then headed to Brussels for negotiations in the European Council aimed at finding common ground on changing the EFSF and on the level of private-sector participation in the Greek bail-out.

In the Bundestag, Merkel hinted at what she would be arguing for, saying that she wanted to see Greece’s debt level reduced to 120% of gross domestic product by 2020.

She said that this would not be possible “unless the private sector bears a considerably higher share of the burden” than the 21% haircut on Greek government bonds agreed when eurozone leaders met on 21 July. The speed and scale of reduction suggested by Merkel would mean that private bondholders would have to take losses of 50%, slightly less than the 60% suggested in a paper drawn up by Greece’s international lenders last week.

“The world is watching Europe and Germany,” Merkel said. “It is watching whether we’re ready and able, in the hour of Europe’s deepest crisis since the end of the Second World War, to accept responsibility.”

German parliamentarians voted by a large majority to back Merkel, with 503 in favour, 89 against, and four abstaining.

But Silvio Berlusconi, Italy’s prime minister, is struggling to keep his governing coalition together as he tries to agree austerity measures. Last night, he was to present to his eurozone counterparts austerity measures that were the fruit of tense negotiations with his coalition partners on Tuesday night (25 October).

Negotiations in the European Council were starting last night as European Voice went to press. The EU has promised to come up with a far-reaching response to the debt crisis before the meeting of leaders of the G20 group of the richest and emerging economies in Cannes on 3-4 November.